A beta score for stocks helps assess how volatile a stock is relative to a major stock index. In this way, beta is a quick measure that traders can use to determine whether an asset is too risky for them, if the stock moves enough to meet their objectives, and how beta can also help in position sizing.
The index always has a beta of 1. A stock price that moves twice as much as the index will have a beta of 2. If the stock price only moves half as much as the index, then it will have a beta of 0.5.
A long-term investor or position trader may not wish to own volatile stocks. If they prefer stable companies that grow over time, they may decide to only invest in stocks with a beta value of near or under 1. On the other hand, a short-term trader such as a day or swing trader may only want to trade stocks that move a lot. They may look for stocks with betas of 2, 3, or higher, for example.
Position size may also be affected by beta. Since a low beta stock moves less than a high beta stock, theoretically, a person could invest more money into a lower beta stock and less money into a higher beta stock. A 5% upward move could have the same impact on the overall portfolio as a 10% upside move when there is twice as much capital in the 5% stock.
Beta measures a stock versus an index, so it is a comparative measure. In a volatile market, where both the stock and index are making big price moves, the beta value may not change much. But if a stock is volatile and the index is not, or the index is volatile and a stock is not, this may affect beta.